The Impact of Investment Constraints on Portfolio Performance Measurement: The Power Utility Function Case

Rajna Gibson and Nils S Tuchschmid

The Financial Review, 1995, vol. 30, issue 2, 243-73

Abstract: This paper examines the effect of investment constraints on performance measurement of institutionally managed funds. Assuming that these funds have a power utility function and using an optimal portfolio choice model, one can show that the Security Market Line remains a valid benchmark for these constrained funds under the perfect market assumption. Relaxing the perfect market assumption, one can prove that a non-stationary constrained investment policy will bias traditional measures of timing ability differently across managers types. Finally, the magnitude of this bias is illustrated with a numerical example. Copyright 1995 by MIT Press.

Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:bla:finrev:v:30:y:1995:i:2:p:243-73

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